How tO determine YOUR acceptable CAP rate for a large property?

Question

I'm actively searching to purchase a 10+ unit residential property. I'm struggling to determine what acceptable CAP rates (CAP Rate= NOI/Purchase Price) are for particular areas. I realize that CAP rates vary considerable across the country. In New York or Chicago an investor may consider an acceptable cap rate to be 4-8%, but what about smaller markets. Or different neighborhoods or areas within a city.

For instance, I'm struggling to determine appropriate CAP rates for A, B, C class neighborhoods within areas of my local market of St. Louis. Do I need to talk to bankers or appraisers to gain this knowledge?

For instance, I'm struggling to determine appropriate CAP rates for A, B, C class neighborhoods within areas of my local market of St. Louis.  Do I need to talk to bankers or appraisers to gain this knowledge?

Rick L. · Answer

Thanks for the responses.  Just to follow up...I spoke with a commercial bank lender I'm working with who was able to provide me with more than enough information over the phone.  I would definetly recommend others who are interested in learning more about Cap rates for their areas to do so as well.

Wendell De Guzman · Answer

@Rick L. , 10-units is not large at all. Go for 100 units. The work involved in finding the deal is the same and the returns is higher.

Regarding your question, instead of going for average cap rates, I would  buy a property if it makes sense financially in a location with solid  job growth. I go for above-average returns and so average cap rates to me - is meaningless information.

Jeff Greenberg · Answer

We talk to commercial Brokers for sub-market Cap rates.

Jimmy Klein · Answer

I can tell you write now St. Louis cap rates will be very high. It will definately be higher than the average given the market there. NYC is less than 5%, since most MF is always a 100% occupied. However, in regards to determining it, appraisers are the best, but they will charge you for it. If you have contacts at a local bank, they can probably give you a good idea since they probably have financed something there.